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Wednesday, January 9, 2013

Interview with Elhanan Helpman

Douglas Clement has a characteristically excellent "Interview with Elhanan Helpman" in the December 2012 issue of The Region, published by the Federal Reserve Bank of Minneapolis. The main focuses of the interview are "new growth theory, new trade theory and trade (and policy) related to market structure." Here's Helpman:

On the origins of "new trade theory"

"When I was a student, the type of trade theory that was taught in
colleges was essentially based on Ricardo’s 1817 insight, Heckscher’s
1919 insights and then Ohlin’s work, especially as formulated by [Paul]
Samuelson later on. This view of trade emphasized sectoral trade flows. So, one
country exports electronics and imports food, and another country
exports chemicals and imports cars. This was the view of trade. The whole research program was focused on how to identify features
of economies that would allow you to predict sectoral trade flows. In
those years, there was actually relatively little emphasis on Ricardian
forces, which deal with relative productivity differences across
sectors, across countries, and there was much more emphasis on
differences across countries in factor composition. ...

Two interesting developments in the 1970s triggered the new trade
theory. One was the book by Herb Grubel and Peter Lloyd in which they
collected a lot of detailed data and documented that a lot of trade is
not across sectors, but rather within sectors. Moreover, that in many countries, this is the great majority of trade. So, if you take the trade flows and decompose them into, say, the
fraction that is exchanging [within sectors] cars for cars, or
electronics for electronics, versus [across sectors] electronics for
cars, then you find that in many countries, 70 percent—sometimes more
and sometimes less—would have been what we call intra-industry trade,
rather than across industries....

The other observation that also started to surface at the time was
that when you looked at trade flows across countries, the majority of
trade was across the industrialized countries. And these are
countries with similar factor compositions. There were obviously
differences, but they were much smaller than the differences in factor
composition between the industrialized and the less-developed
countries. Nevertheless, the amount of trade between developed and
developing countries was much smaller than among the developed
countries.

This raised an obvious question. If you take a view of the world
that trade is driven by [factor composition] differences across
countries, why then do we have so much trade across countries that look
pretty similar? ...

Then, on the theoretical
front, monopolistic competition was introduced forcefully by both
Michael Spence in his work, which was primarily about industrial
organization, and [Avinash] Dixit and [Joseph] Stiglitz in their famous
1977 paper. These studies pointed out a way to think about
monopolistic competition in general equilibrium. And trade is all—or,
at least then, was all—about general equilibrium.

So combining these new analytical tools with the empirical
observations enabled scholars to approach these empirical puzzles with
new tools. And this is how the new trade theory developed."

On trade and inequality: an inverted U-shape?

"Most of the
work on trade and inequality in the neoclassical tradition was focused
on inequality across different inputs. So, for example, skilled
workers versus unskilled workers, or capital versus labor, and the
like. There was a lot of interest in this issue with the rise in the
college wage premium in the United States, which people then found
happened also in other countries, including less-developed countries. ...The other interesting thing that happened was that labor
economists who worked on these issues also identified another source of
inequality. They called it “residual” wage inequality, which is to say,
if you look at wage structures and clean up wage differences across
people for differences in their observed characteristics, such as
education and experience, there is a residual wage difference, and
wages are still quite unequal across people. In fact, it’s a big
component of wage inequality.

Our aim in this research project, which has lasted now for a
number of years, was to try to see the extent to which one can explain
this inequality in residual wages by trade. It wasn’t an easy task,
obviously, but the key theoretical insight came from the observation
that once you have heterogeneity in firm productivities within
industries, you might be able to translate this also into inequality in
wages that different firms pay. ...We tried to combine these insights, labor
market frictions on the one hand and trade and firm heterogeneity on
the other ...We managed eventually, after significant effort, to build a model
that has this feature but also maintains all the features that have
been observed in the data sets previously. It was really interesting
that the prediction of this model was that if you start from a very
closed economy and you reduce trade frictions, then initially
inequality is going to rise. However, once the economy is open enough,
in a well-defined way, then additional reductions in trade friction
reduce the inequality. Now, it is not clear that this is a general
phenomenon, but our analytical model generated it. ... [I]t’s an inverted U shape ..."

On how the gains from research and development spill across national borders

"We computed productivity growth in a variety of OECD [Organisation
for Economic Co-operation and Development] countries in this
particular paper. We constructed R&D capital stocks for countries ... Then we
estimated the impact of the R&D capital stocks of various countries
on their trade partners’ productivity levels. And we found substantial spillovers across countries. Importantly,
in those data, these spillovers were related to the trade relations
between the countries. And we showed that you gain more from the
country that does more R&D if you trade with this country more. This
produced a direct link between R&D investment in different
countries and how trading partners benefit from it. ...

The developing countries don’t do much R&D. The overwhelming
majority of R&D is done in industrialized countries, and this was
certainly true in the data set we used at the time. So we asked the following question: If you look at developing
countries, they trade with industrialized countries. Do they gain from
R&D spillovers in the industrialized countries, and how does that
gain depend on their trade structure with these industrialized
countries? We showed empirically that the less-developed countries also
benefited from R&D spillovers. And the more they trade with
industrialized countries that engage heavily in R&D, the more they
gain. ...

One of the important findings—which analytically is almost
obvious, but many people miss it—is that, if you have a process that
raises productivity, such as R&D investment, then this also induces
capital accumulation. So then, the contribution of R&D to growth
comes not only from the direct productivity improvement, but also
through the induced accumulation of capital. When you simulate the
full-fledged model with these features, you get a very clear
decomposition. You can see how much is attributable to each one.

With this, we could handle a relatively large number of countries
in all different regions of the world, and [run some] interesting
simulations. We could ask, for example, if all the industrialized
countries raise their investment in R&D by an additional half
percent of gross domestic product, who is going to benefit from it?
Well, you find that the industrialized countries benefit from it a lot,
but the less-developed countries benefit from it also a lot. It was still the case that the industrialized countries would
benefit more, so in some way it broadened the gap between the
industrialized and the less-developed countries. Nevertheless, all of
them moved up significantly."